It’s important to know, the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”, along with recent guidance from bank regulators, has increased the flexibility banks have in offering loan modifications to their borrowers.
Historically, troubled debt restructuring (often referred to by the acronym “TDR”) rules have limited banks’ ability to modify loans. A TDR occurs if a bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider. If this happens, the bank is required to set aside income from operations to fund a special reserve. But using funds in such a reserve decreases a bank’s earnings which then limits the amount the bank can lend. In short, a TDR is generally a bank’s last resort.
The CARES Act gives banks the ability to modify interest rates and repayment terms of loans without triggering TDR provisions so long as the loan is not more than 30 days past due (as of December 31, 2019) and the borrower’s adverse circumstances are specifically related to COVID-19.
All of this means that your bank now has congressional and federal regulatory flexibility to modify your loan without the risk of negative impacts it would normally face when modifying a loan. It’s important to request a modification if you need one – your lender won’t proactively reach out to you first. Also, banks likely have more money to lend so if you need more credit to survive the pandemic, ask.
Please note, if you do get approved for a loan modification you must make your payments on time. If you’re late even one time you may very well find yourself right back where you were when you started the loan modification process.
Your best bet – contact your bank and ask what they can do for you by way of a temporary loan modification or a new loan. Take good notes, weigh the pros and cons, and then decide the action that will be best for you.
The author, Rick Sheppard, is a licensed real estate broker with RE/MAX Achievers, Inc in Pennsylvania and a 32+ year veteran of the real estate trenches. He knows a lot because he’s seen a lot. If you have any questions about this or any real estate related topic, feel free to contact Rick at [email protected] and he’ll do his best to answer your questions.